Most investors are aware of why they are investing—for many, it’s to meet the objective of accumulating adequate savings for retirement spending. Yet, portfolios based on 60/40, or other rule-of-thumb allocations (such as target date funds), are focused on the “how” of managing asset volatility as opposed to the “how” of meeting long-term investment goals.
The role of fixed income duration in a 60/40 portfolio was traditionally meant to offset the stock allocation during periods of equity market stress. It adhered to an investing generalization: “when a recession hits and stocks do poorly, rates will fall, and duration exposure will mitigate the portfolio’s downside return.” However, the recent past is rife with market shocks when interestrate volatility drove notable equity selloffs, the most recent one arriving in late 2021/early 2022. Hence, rule-of-thumb portfolios not only fail to target investors’ objectives, they also frequently come up short in mitigating account balance volatility.
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